Brookfield India Real Estate Trust (BIRET) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Brookfield India Real Estate Trust Second Quarter Financial Year 2024 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded. On the call, we have the following persons: Mr. Ankur Gupta, Managing Partner, Brookprop Asset Management and Director, Brookfield Management Services Private Limited; Mr. Alok Aggarwal, Chief Executive Officer; Brookprop Management Services Private Limited; Mr. Sanjeev Kumar Sharma, Chief Financial Officer; Brookprop Management Services Private Limited; and Mr. Rachit Kothari from Brookfield; and also Mr. Sabdani from Brookfield. I now hand the conference over to management. Thank you, and over to you, sir.

Thanks. Hello, everyone. Thanks for joining the Brookfield REIT Q2 FY '24 earnings calls. And I'm pleased to say that we have successfully completed the acquisitions of Downtown Powai and Candor TechSpace G1 in August '23. With these acquisitions, we have now doubled the scale of our lead since the [ IPO ], with operating income increasing from approximately -- operating area increasing from approximately 10 million square feet to over 20 million square feet. The diversification benefits of these acquisitions is also significant, Mumbai and Gurugram each represent 1/3 of our portfolio by value. The share of BFSI and consulting tenants has increased to almost 40% from 32% earlier. The tenant concentration of the technology sector has reduced from mid-40s to 30% earlier, from mid-40s to 30% now. Our top 5 tenants' concentration has also reduced significantly from 52% to 31%, and our top 10 tenant list has seen an influx of BFSI and consulting names such as Deloitte, Nomura and CRISIL, amongst others, achieving scale and derisking the portfolio through the acquisition of high-quality assets has been our stated objective and we're happy to be executing on our plans. Coming to the performance of our portfolio, leasing during the quarter, having achieved after 0.5 million square feet gross leasing. We leased [ 326,000 ] square feet in our [ SEZ ] assets during the quarter, which is almost 70% higher than our post-IPO quarterly average. GCCs constituted approximately 68% of the new leasing achieved in the SEZ assets with the likes of L&T Hydrocarbon, Saxo Group, Qualcomm, EUI and Amdocs, expanding their footprints at our campuses. We further signed expansion options of 94,000 square feet at N2. We would also like to highlight that our non-SEZ portfolio is nearing stabilized occupancies, with N1 already being 97% occupied and Downtown Powai almost 90%. Our scheduled expiries for the pre-acquisition assets largely schedule to happen in H1 FY '24 and have impacted our reported committed occupancies. We also had an increase in same-store expiries, the pre-acquisition SEZ assets during the quarter. However, we feel that structurally that prices are largely behind us. In Q1, we saw expires of about 0.3 million square feet, which is completely backed by income support. In Downtown Powai we advanced to renew the scheduled expiries of 2.4 million square feet in H2 FY '24 as a significant mark-to-market spread. In FY '25, our SEZ portfolio only has scheduled expiries of 0.2 million square feet. Hence, we are well positioned to see an improvement in our SEZ occupancies next year onwards. Our non-SEZ portfolio has scheduled expiries of 0.5 million square feet, which we expect to get renewed or backfilled with high demand that we see for space in these assets. As we limited expiries due and strong demand across the board, we expect to see an improvement in our portfolio's committed occupancy over the course of financial year '25. The physical occupancy at our campuses continue to improve, [ we got ] calls from many of our tenants asking the employees to return to work showing results. We have seen the impact of this with the acceleration in the expansion plans of our tenants. In fact, some of our tenants who had given up spaces -- who have given up space less than a year back and are asking traditional space in our campuses as they run out of space to see their employees. All this bodes well for leasing momentum. We have displayed strong organic growth with our existing leases having delivered a 7% average escalation on 1.6 million square feet during the quarter. In H1 '24, we achieved an average escalation of 8% on 3.9 million square feet. Initially, we are on track to deliver about 80,000 square feet of area, which is under development in Downtown Powai in the ongoing quarter. I'm pleased to report that we have achieved a 5 Star rating for the second year in a row. This truly heartening to be recognized of our efforts to place ESG in the center of what we do. We are ranked #1 in Asia for management score and achieved a score of 100% in both social and governance categories for both standing investments and development. Additionally, we were awarded the prestigious Sword of Honor for 5 of our assets by the British Safety Council. These assets were also awarded a 5-star rating for the second consecutive year in the occupational health and safety audit with a score of 90% plus, the best practice indicator. During the quarter, we conducted workshops for tenants and employees on waste recycling and segregation, plastic reuse and sustainability. We also unveiled the green cover book and biodiversity report, which provides insights into our asset's current biodiversity profile. As always, we continue to prioritize ESG and take the necessary measures to ensure our [indiscernible] leaders on the ESG front. Our high-quality portfolio has growth headroom of 14%, which will be realized through further leasing and the growing physical occupancy margin recovery. We will now look to consolidate the recently acquired assets before we embark on figure in organic growth. We continue to have access to almost 30 million square feet of the sponsor book assets in key gateway cities in India, which provides a strong medium- to long-term growth potential for REIT. Now I would like to invite Sanjeev to provide the financial updates. Thank you.

Thank you, Alok. Good afternoon, everyone. As Alok mentioned, we have successfully consummated the acquisition of Downtown Powai and Candor TechSpace G1 in the September quarter. Not only did this transaction led to a diversification of our tenant base, but the successful fundraising program also helped diversify out our investor base. We also secured a INR 400 crore investment from our sponsor group through a preferential issuance at a 25% premium to the prevailing market price. We also issued our first commercial paper of INR 750 crore this quarter at an extremely attractive rate and used the proceeds to rightsize our SPV level debt at Downtown Powai and Candor TechSpace G1. We have witnessed a growth of 33% in our operating lease rentals to INR 274 crores compared to the same period last year, and that adjusted NOI grew by 43% to INR 346 crore compared to quarter 2 of financial year 2023. This increase was primarily due to the addition of Downtown Powai and G1 to the portfolio. Post the acquisition, we have significant growth potential of 14% in our portfolio, which can be achieved through the lease-up of vacant area and margin recovery. We have also achieved an NDCF of INR 193 crore this quarter, which translates to INR 4.39 per unit. We are distributing INR 4.40 per unit this quarter. The NDCF per unit was lower than our quarterly run rate since Downtown Powai and G1's contribution was restricted to 34 and 44 days, respectively, during the quarter. The pre-acquisition SPVs generated an NDCF of INR 5.03 per unit without considering the impact of dilution from the units issued at QIP and the preferential allotment. Additionally, we are in the process of filing capital reduction schemes in some of our SPVs, which is expected to enhance the dividend component of distribution for the implementation of these schemes. Due to the acquisitions and the organic growth in our portfolio, our gross asset value grew 74% to INR 28,500 crore. And our NAV as of 30th September 2023 is at INR 323 per unit. Our loan-to-value ratio is 38.5% However, if we exclude shareholders NCD and liability component of CCD from minority shareholders, GIC in two of these new acquired SPVs, LTV comes to 34.3%, which represents LTV basis external third-party debt. While we look to resize the debt, we will do so when market conditions are favorable. The average interest rate of the portfolio debt is 8.3% as on September 30, 2023. And we have a strong balance sheet with a long-dated maturity profile and limited refinancing and amortization over the next few years. Thanks a lot. With this, I would request the moderator to open the floor for Q&A.

[Operator Instructions] The first question comes from Puneet Gulati with HSBC.

Yes. Congrats on a good distribution. Can you help me run down this enhanced distribution of 4.4%, how did you get that? And does that -- look there is a gap apparently on the NDCF walk down, if you can help me understand the gap also from 2,048 million down to the distribution.

So Puneet, on 21 -- Slide #21, we have given NDCF walk down for SPV level, so which is coming to 2,048 million. And then that 2,048 million gets distributed in the form of interest on shareholder and repayment of shareholder debt or NCD, which is given on Slide 22. And in turn, REIT has invested INR 51 crores of shareholder loan to the couple of existing SPVs. That's why it is coming -- the net figure is coming to INR 193 crores, which is INR 4.39. And I would like to mention here that when I mentioned INR 5.03 distribution from the existing SPVs, that number is after netting of this INR 51 crore, which these SPVs receives from share REIT.

I would have thought INR 2,048 million minus, INR 51 crores minus INR 6.5 crores. Should that not -- or plus INR 6.5 crores this time. Should that not have been the math? Are we not counting INR 51 crore two times.

No, but INR 2,048 million is the generation this quarter, but there are surpluses in the SPVs, which is carrying from the previous quarter as well as the two of the SPVs which we acquired. There were certain cash balances lying in those SPVs. So the total, which SPVs have distributed to the REIT is INR 237 crore, which is some total of INR 101 crores and INR 136 crores. Then net INR 51 crores and treasury income INR 6.5 crores need to be added, which comes to INR 193 crores.

Understood. So would it be fair to say that the cash flow generation would have been INR 160 crore, but INR 192 crore, INR 193 crores got distributed. Is that how one should think?

It's not the cash flow generation. It's because NDCS definition is it gives only a framework what needs to be included in NDCS and what needs not to be included in NDCS. But as far as overall cash flow on a cumulative basis, if you see the 6 months cumulation, that is what we distributed. So as an example, when we acquired this new SPV, the consideration paid was net of the cash balances or net of all other assets, but that cash belongs to REIT now.

Okay. Understood. And secondly, on the NOI side of income support, so are we using a full quarter of income support in this NOI calculation? Or is it proportionate to whatever the few days, 34 days I think which you mentioned?

So for -- when I run -- go to the NOI number, it is net for the period post-acquisition.

Okay. So the INR 50 crore income supported only for the roughly a month?

No, no, INR 51 crore, because it is getting presented in the NDCF walk, that's why it's including opening. But for the NOI numbers, which is coming in the account is only for the proportionate period.

Yes. Puneet, I think this quarter's distribution factors for G1 income support from 1st July.

Okay. That's what I would [ to listen ]. And lastly, on Kensington, there seems to have some bit of deterioration in the facility rental while [ healthy ] margin that there hasn't been occupancy change on a Q-on-Q basis. Which has gone up. So INR 41.5 crores in Q1 has gone down to INR 35.2 crores, but your committed occupancy from June 30 has gone up from 79% to 84%, can you help me understand what's happening there?

[Technical Difficulty]

Next question comes from Murtuza Arsiwalla with Kotak.

We're still on the previous question. Puneet, basically, what is happening is that the leases that we have entered into during the quarter are reflecting in the occupancy number. Some of the lease is going to be reflected in the numbers in the subsequent quarter. The expiry we had in the last quarter, the impact of that dip is reflecting in this quarter. So basically, the leasing and the expiry which happened reflect in the numbers with the lag.

Right. So the LNP Downtown 72,000 additions which have got probably happened towards the later part of the quarter?

Yes. That's it.

The next question comes from [indiscernible] Shah with DV Investments.

Hello? Am I audible?

Yes.

Sir, all our acquisitions have been done from the sponsor with -- in some cases, committed occupancy and also dilution to the sponsor. Our sponsor is like a AAA credit, large fund. Why have you not explored acquisitions from non-sponsor stress market which would be more lucrative to the firm?

Maybe I'll take that. Look, I think to answer your question, the quality of assets, does the REIT as a long-term strategy would like to hold, would come from, I would say, AAA sellers, typically. And I think our sponsor group that has contributed assets has generally been limited [ like ] funds. That said, we have been exploring third-party opportunities. To the extent we like the quality, the location, the income profile. We would not shy away from making those acquisitions, but it's also a function of the opportunity that is there in the market. And we continue to scout for them. But I would say one very important consideration for us is for these acquisitions to be accretive to the REIT, which means they have to come from a stable and income profile, which are just generally stable in nature, occupancies, which are inching up and rental profiles that would deliver a total return [ loss ] of 15% to 16%. All those criteria very difficult to find in new investments, but we continue to look further.

Okay. Sir, one more question is on the distribution, the effective tax rate to the unit holders is low because the dividend is tax free as the SPVs are in the old tax regime. So this opportunity would be over in some years. So is it safe to assume that post some years, the effective tax rate would be marginal tax rate, which is full tax?

So let me answer [indiscernible] here. Two things. One, over a period of time, definitely the dividend paying capacity will increase of these SPVs in normal course. But to accelerate the same process, as I mentioned in my briefing also, we are filing one scheme of capital reduction to the NCLT, which will wipe off the accumulated losses sitting in these SPVs, so that SPVs' dividend paying capacity gets enhanced earlier than a normal process. So maybe a year or 9 months down the line, our dividend distribution from the SPVs will get enhanced from the stage where we are as of now.

The next question comes from [ Shirish ] as with Moneyife Adviser Services.

My first question primarily deals with our SEZ. So I just wanted to understand, are we looking at de-notifying some of the vacant blocks that we have considering the fact that the committed occupancy across some of our SEZ parts like G1 and 2 is low. So these would probably provide ample opportunity for de-notification so are we looking at that as an option going forward?

Yes,[ Shirish ]. I think that's a -- I think good and obvious question. We have identified the areas and as soon as we are waiting to get the reforms. They get -- maybe they can happen this quarter. If they don't happen this quarter, at least by next quarter, they should definitely happen. We're hopeful for them to happen this quarter. We have identified the areas which you would like to de-notify in each of ICS. And of course, sales-wise program. And some criteria have been a certain which will take some of the areas first, which have never been leased, which have excess -- which can require so the criteria have been [identified]. And as soon as so we'll take them to the de-notification in the face manner.

Got it, sir. So like under the existing rules, like let's say, for some reason, if the reforms get delayed, so would we be also moving to de-notify under the existing roles where we can -- do we have any opportunities where we can de-notify entire buildings in these parts?

So under existing rules, we do not have opportunities to de-notify, and we have -- so we are aware of that. So we'll have to wait for the SCG reforms to be able to be de-notify, the existing buildings or the existing floors.

Okay. Got it. And the second question pertains to N2. So the income support, I think and said this financial year will be -- the income support would end. So post that, because there's a large difference between committed and economic occupancy, just wanted to understand what the strategy would be to sort of increase that over there?

So yes, so a fair point. So if you really see in Noida, we have 2 assets, and one is largely 97%, probably even go further 98%, 99%, it may touch 100% actually. And now we are left with N2. And what we are doing is every entire pipeline we are focusing on N2, and we have got some successes. And we are hopeful that we should be able to ramp up the occupancy. And if SEZ reforms happen, then, of course, it could go much faster. And we think that should happen, enough discussion happen and we are constantly. So our focus remains on N2 to ramp up occupies in next 2 quarters.

[Operator Instructions] The next question comes from Murtuza Arsiwalla with Kotak.

Alok, just wanted to check, you talked about the rental escalations of 7% on 1.6 million square feet. Just to be clear, these are your typical contractual escalations? And part to that question is we're used to usually seeing double-digit kind of contractual escalations going by thumb rule of 15% every 3 years. So whatever typically would come up for contract escalation will be in double digits. So how should we read at this 7% in the current quarter, 8% for the first half, in terms of rental escalations or is my understanding around this being contractual sort of on? And the second question is really on the interest cost. My understanding is that the interest cost that we are seeing on the P&L this quarter only takes part quarter of the interest cost attributable to the new assets. And therefore, what will be a normalized can I just assume on the INR 11,000 crores of gross debt at the interest rate for the second half of the year?

Yes. Murtuza, let me take the first question. So you see the escalations are either 15% every 3 years, and many of the cases, they are 5% every year. So what we're talking here about is that average increase in this quarter. We're talking about -- that should -- I hope that [ clarifies ] your question.

So there would be a large proportion of such contracts, which have annual -- if I were to break up your portfolio in terms of annual escalations versus 3-year escalations, will you have some ballpark mix?

So largely, Mumbai is annual escalation and started out Gurugram, Noida is every 3 years, expect a function of -- a bit of a function of market. And Murtuza on the financing cost, just to give you a split, the pre-acquisition portfolio is at 8.2 coupon PAPM. The acquisition portfolio debt is 0.5%, and the CP is at 7.66 PAPM. The rest of the debt, as Sanjeev articulated in his opening remarks is largely more from a consolidation perspective and shareholder debt. So these are the 3 external buckets that you should probably factor in, which on a blended basis is 8.3% for the external debt.

The next question comes from Saurabh Kumar with JPMorgan.

A few questions. So the first is, so if we remove this income support this quarter -- or sorry, the acquisition impact, would it be fair to say the NOI was like largely flat Q-o-Q?

Yes, Saurabh, it was flat on a year-on-year basis.

Even quarter-on-quarter, right? I was getting a marginal decline of INR 6 crores.

Yes, it's more or less same range.

Okay. And second, sir, is essentially when would you expect your net leasing to turn positive. So your gross is obviously doing okay. But on a net basis, when do you expect to turn positive?

No, I think Saurabh that's what we believe. [Technical Difficulty]. Saurabh, actually when I made the statement earlier as you said, that we have seen the senders in H1 and senders largely behind us. And from a financial year or I would say calendar year Q2 onwards, we should see occupancies move up gradually.

Okay. So your net leasing should turn up positive, maybe this quarter onwards then, right?

Quarter after next because the impact of this quarter to next quarter and next quarter impact would see, I would say, April, May, and that's the time we are confident that net leasing should be positive. And this is without reforms. That's something you should keep in mind.

So if SEZ notification comes, then that's an added positive Okay.

Yes.

Okay. And on -- sir, basically, there's your GAV map, so the GAV you're reporting on a rupees billion basis is for the full consolidated, but the per share is your share, right, which is attributable to the REIT.

Yes. Yes.

Okay. And just one last thing. I mean, so whatever the India-Canada thing, no impact on, hopefully, [Brookprop] investment plans in India?

Absolutely, absolutely done.

The next question comes from Sri Karthik Velamakanni with Investec.

So you disclosed the unadjusted premerger distribution to be close to INR 5.3-odd and the post-merger close to INR 4.4. There are a couple of questions here. One is, if you were -- you also indicated the number of days for which you received the NOI from the acquired assets. So if that were to be fully normalizing for the entire quarter for Q3, would your distributions organically move close to 5% on -- a INR 5 on a post-merger basis?

So Sri, the answer is it is going to be more or less same because only the impact of whatever expiries have happened, happened, as Alok mentioned. So from next quarter onwards, it should be stable.

But stable, you are anchoring to the INR 4.4 level is it?

No, it is going to be because INR 4.4 has only part of these 2 acquisitions, but the quarter impact will come, it will go to the -- more or less original run rates.

Which is close to around INR 5 a quarter sort of a level?

Yes, more or less.

Understood. Secondly, the trend with respect to the occupancy level G2, which is now down to around 78%. And there's a very sharp drop. I know you've spoken about this in the opening remarks, but directionally, both the Gurugram assets seem to be trending weaker than some of our peers, which have reported early on. Any specific event that is peculiar to Gurugram that is driving this?

So really, if you really see it's -- so let me take SEZ versus non-SEZ, I think we are all clear that non-SEZ doing fantastically well, whether it's N1 or [indiscernible] in terms of rate as well as occupancy. Well, let's come to SEZ assets. But SEZ Gurugram and N2, I mean, they are -- they have kind of been impacted due to vacancies. This is rated all 3. But as we said, that from Q2 next year onwards, we should start. So the pipeline is strong. The good part is that pipeline is strong. It's almost about 2.2 million square feet. And it is not that we have not been doing leasing in SEZ. We did almost -- you see a 25,000 square feet leasing last quarter, I mean last only in SEZ. Even previous quarter, we did good leasing in SEZ. So leasing momentum is there. Pipeline is there. We have, in many cases, great tenants who have given us space. They have more people coming back to offices. They said, I want to close in a month. That's what we're having. So the biggest -- and the tenants are behind us. I mean, that's the important point. And leasing momentum, we are confident should continue in a series about, let's say, about 0.3 million square feet and that should reflect in occupancy is moving up.

The next question comes from Pradyumna Choudhary with JM Financial.

So one thing I missed out on when you mentioned -- when you expect the net season to turn positive from, I missed out the exact quarter you mentioned.

Yes. So yes, it's about Q2 '24 onwards. When we look at calendar year from April quarter onwards, we should see turning gets positive.

And while that so like why so much of a delay because of the weakness in demand or some other reason also? Like of course, I'm aware of the SEZ issue. But apart from that, any other thing which you witnessing?

No, it's a leasing -- it's a kind of a center what we indicated our debt and the leasing run rate what we are having. It should -- it indicates that from -- I mean, it's not just about 2.5 months away, and we should see a positive number.

Understood. And so do we expect the occupancy to remain at a current levels until then or would it decline further because already, we are at 80% occupancy -- committed occupancy?

It should remain around that level. That's our indication. And what we were talking about we are saying they are no SEZ reforms. I think if they come more. So without SEZ to remain that level.

And net leasing, is it positive? Any non-SEZ currently or even there, we see a certain weakness?

No, non-SEZ, we have 97%. I mean, in N1 we are 97%; in Powai, we are approaching 90%. We have -- in next quarter, we have 2 large expiries of [ 0.4 ] million square feet. We have almost kind of discussions are at last stage with almost 30% mark to market. So honestly, this is doing strongly well. It's only a portion of SEZ portfolio, which would start [filing] in next 4 to 5 months actually. And that's also -- I mean it's visible that I think run rate is visible. Expiries are behind us, some [indiscernible] will happen by March, and that's where we are.

Next question comes from Suresh with Moneylife Advisory Services.

I just have a follow-up question. Sir, just wanted to understand if you can provide the split between for releasing spreads between our renewals and weakened area? What would be the split between those?

So it's 18% and 6%.

Pardon, sir. Can you just repeat?

19% is the releasing spread on the releasing and 6% on renewals.

As there are no further questions, I would now like to hand the conference over to the management for closing remarks.

Thank you, everyone, for joining today's call. I wish each and every one of you a happy Diwali and look forward to connecting you next quarter. Thank you.

On behalf of Brookfield India Real Estate Trust, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.